Trade has grown tremendously between Asia and Middle East in recent years and a significant portion of trading is conducted via the shipping industry.

Trade has grown tremendously between Asia and Middle East in recent years and a significant portion of trading is conducted via the shipping industry. A transparent and competitive shipping industry will benefit all parties involved. Investors in Asia, flush with funds and looking for investment opportunities, will naturally consider the burgeoning Middle Eastern shipping companies.

However, a few bad actors engaging in illicit activities and corruption risk sullying the reputation and bringing down the financial valuation of the entire industry. Either executives can take preventive and corrective actions now or risk financial losses in the future as governments intervene and bog down the industry with regulation and micromanagement.

As one example, there are cases of trafficking and corruption in the Middle East shipping industry that are designed to avoid sanctions, taxes and undermine legitimate trade. Illegal contraband includes weapons, narcotics and illicit goods like cigarettes. Companies may engage in these illicit activites by falsifying bills of lading, creating shell companies to hide illegal businesses, and obscuring origin/destination by re-labeling, re-marking etc.

Recently, the Islamic Republic of Iran Customs Administration has fined a South Korean home appliance manufacturer about US$750 million for violating Iran’s import regulations and evading tariffs. The South Korean company had dodged the payment of US$450 in tariffis by shipping disassembled products through separate customs bureaus. When shipped as final products, home appliances are subject to import tariffs of more than 50 per cent. However, the tariffs are considerably less for parts used in appliance manufacturing in a bid to support domestic industries.

Iran is heavily sanctioned by the United Nations and global community but still actively manages to find ways to circumvent the ban and engage in overseas procurement operations of sensitive goods. Recently, Reuters reported that Iran used companies in China to finance overseas purchases of the Islamic Revolutionary Guards Quds Force (IRGC QF). The coveted banned goods were then shipped back illicitly. The IRGC QF is an elite governmental group that supports pro-Iranian militants in the Middle East.

Tobacco is one of the most commonly smuggled goods. Substandard cigarettes are often cheaply made in Eastern Europe, circumventing European Union safety regulations. They are then transported onboard container ships in Bulgaria that move through the Black Sea, then into the Aegean via the Bosporus Strait. From there, some of the contraband shipments make their way to Syria, while others continue down to the Red Sea and around to the Persian Gulf to other countries in the Middle East.

In the Middle East, over 600 billion illicit cigarettes are smoked every year. This illicit activity costs governments in the Middle East about US$800 million a year in lost revenue. On the black market, generally a pack of 20 illicit cigarettes cost less than half the price of the original ones.

Giving and taking bribes is a prevalent practice in the ports of Middle East. It is often customary to bribe local officials such as port inspectors and harbor pilots with cigarettes, alcohol or cash. For example, in the Suez Canal (known infamously as Marlboro channel), even big companies such as Maersk succumbed to bribing in order to avoid negative consequences. When arriving or leaving port, captains face the prospect of harassment, long and expensive delays and other issues if they do not make small payments of cash, cigarettes, or alcohol.

For the past decade, Asia is already the largest trading partner of the Gulf Cooperation Council (GCC), a collaborative group of six wealthy Arab countries. Now, China is embarking on the One Belt One Road initiative including the Silk Road Economic Belt and 21st Century Maritime Silk Road. More than ever, these initiatives will significantly boost trading between Asia and the Middle East. Major cargo ports in Asia include Singapore, Hong Kong and Shanghai. Major cargo ports in the Middle East include Port of Jebel Ali, Port of Khor Fakkan, United Arab Emirates; Port of Jeddah, Saudi Arabia; Port of Salalah, Oman; and Port Said East, Egypt.

Investors are taking notice of this upward trend and looking into investing in shipping companies that navigate these trade routes between Asia and the Middle East. However, the CEOs of these companies must address this looming issue of illicit trafficking and corruption so as to protect and uplift the image of the shipping industry. This will directly and positively influence the financial valuation of their companies.

As a immediate first step, executives and shareholders must require their employees to conduct due diligence on all customers and clients and welcome independent audits of their companies’ operations to ensure compliance with local and international regulations. Other mid and long term solutions may include major shipping companies forming alliances to fight corruption and having regular dialogues with governments.

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